ACCT 202: Chapter 6

A company sold 20,000 units of its product for $20 each. Variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is ______.

$180,000 20,000 × ($20 - $11) = $180,000.

Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mugs' profit was ______.

$2,200 Profit = 300 × ($20 - $7) - $1,700 = $2,200.

True or false: The sales mix must be taken into consideration when calculating the break-even point for more than one product due to different selling prices, costs, and contribution margins among the products.

True Because selling prices, costs, and contribution margins of the products differ, the sales mix is assumed to be constant when doing break-even calculations.

When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity, ______.

choose the periods with the highest and lowest levels of activity and their associated costs

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______.

cm ratio × change in sales - change in fixed expenses

After reaching the break-even point, a company's net operating income will increase by the _____ _____ per unit for each additional unit sold.

contribution margin

To calculate the degree of operating leverage, divide _____ _____ by net operating income.

contribution margin

The degree of operating leverage = ______.

contribution margin ÷ net operating income

The calculation of contribution margin (CM) ratio is ______.

contribution margin ÷ sales

To calculate the variable cost per unit using the high-low method, the change in _____ is divided by the change in _____.

cost; activity

Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.

decrease Sales - variable cost = contribution margin so an increase in variable cost per unit lowers contribution margin per unit.

Contribution margin is first used to cover ______ expenses. Once the break-even point has been reached, contribution margin becomes ______.

fixed; profit

The term "cost structure" refers to the relative proportion of _____ and _____ costs in an organization.

fixed; variable

A company currently has sales of $700,000 and a contribution margin ratio of 45%. As a result of increasing advertising expense by $8,000, the company expects to increase sales to $735,000. If this is done and these results occur, net operating income will ______.

increase by $7,750 (($735,000 - $700,000) × 45%) - $8,000 = $7,750 increase

The relative proportions in which a company's products are sold is referred to as _____ _____.

sales mix

The term used for the relative proportion in which a company's products are sold is ______.

sales mix

The rise-over-run formula for the slope of a straight line is the basis of ______.

the high-low method

To prepare a CVP graph, lines must be drawn representing total revenue, ______.

total expense, and total fixed expense

The break-even point is reached when the contribution margin is equal to ______.

total fixed expenses

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by ______.

$0.35

Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is ______.

$380,000 Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000

A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on contribution margin would be a ______.

$450 increase The current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units × $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units × $35), an increase of $450.

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If 10,000 units are sold, net operating income will be $_____.

$5,000 10000 * (10 - 6) - 35000 = $5000

Vivian's Violins has sales of $326,000, contribution margin of $184,000 and fixed costs total $85,000. Vivian's Violins net operating income is ______.

$99,000 $184,000 - $85,000 = $99,000

Profit equals ______.

(P × Q - V × Q) - fixed expenses

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Which of the following statements are correct?

- Baron's net income grows twice as fast as its sales. Operating level of $44,000 ÷ 22,000 = 2 for Baron indicates that the company's net operating income grows twice as fast as sales. - Adams has a higher degree of operating leverage than Baron. Operating leverage: $60,000 ÷ $20,000 = 3 for Adams and $44,000 ÷ 22,000 = 2 for Baron. This means Adams will experience a greater decrease if sales fall.

Elle's Elephant Shop sells giant stuffed elephants for $55 each. Each elephant has variable costs of $10 and total fixed costs are $700. If Ellie sells 35 elephants this month, what are the profit, total variable costs, and total sales?

- Profit = $875 - Total variable costs = $350 - Total sales = $1,925

Which of the following statements are true?

- Scattergraphs are a way to diagnose cost behavior. - Plotting data on a scattergraph is an important diagnostic step.

Which of the following items are found above the contribution margin on a contribution margin format income statement?

- Variable expenses - Sales

When a company produces and sells multiple products ______.

- a change in the sales mix will most likely change the break-even point - each product most likely has different costs - each product most likely has a unique contribution margin

The high-low method ______.

- is based on periods where the activity tends to be unusual - uses only two data points

A company with a high ratio of fixed costs ______.

- is more likely to experience a loss when sales are down than a company with mostly variable costs - is more likely to experience greater profits when sales are up than a company with mostly variable costs

The break-even point calculation is affected by ______.

- sales mix - costs per unit - selling price per unit

CVP analysis focuses on how profits are affected by ______.

- sales volume - mix of products sold - total fixed costs - unit variable cost - selling price

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ______.

- total contribution margin will increase by $0.70 - net operating income will increase by $0.70

The high-low method ______.

- uses only two data points - is easy to apply

Using the high-low method, the fixed cost is calculated ______.

- using either the high or low level of activity - after the variable cost per unit is calculated

CVP analysis allows companies to easily identify the change in profit due to changes in ______.

- volume - costs - selling price

The break-even point is the level of sales at which the profit equals _____.

0

A company incurred $12,000 of maintenance cost for 6,500 machine hours in June and $14,250 of maintenance costs for 8,000 hours in August. Assuming these are the high and low months of activity, the estimated fixed maintenance costs using the high-low method is $_____.

2,250

JVL Enterprises has set a target profit of $126,000. The company sells a single product for $50 per unit. Variable costs are $15 per unit and fixed costs total $98,000. How many units does JVL have to sell to BREAK-EVEN?

2,800 $98,000 ÷ ($50 - $15) = 2,800

The contribution margin as a percentage of sales is referred to as the contribution margin or CM _____.

ratio

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Thus, the degree of operating leverage is _____ for Adams, Inc. and _____ for Baron, Inc.

3; 2

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets that must be sold to achieve the target profit is ______.

40,000 ($520,000 + $320,000) ÷ $21 = 40,000

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. The BREAK-EVEN point in unit sales is ______.

7,625 $305,000 ÷ $40 = 7,625.

A company's selling price is $90 per unit, variable cost per unit is $28 and total fixed expenses are $320,000. The number of unit sales needed to earn a target profit of $200,800 is ______.

8,400 ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.

Cost structure refers to the relative portion of product and period costs in an organization.

False Cost structure refers to the relative portion of fixed and variable costs in an organization.

True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

False The margin of safety is the excess of the budgeted (or actual) sales dollars over break-even sales dollars.

Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.

False This is the engineering approach.

True or false: Without knowing the future, it is best to have a cost structure with high variable costs.

False Without knowing the future, it is not obvious which cost structure is better. Both have advantages and disadvantages.

True or false: When using the high-low method, fixed costs are calculated after variable costs are determined.

True When using high-low, the variable cost per unit of activity is calculated by dividing the change in cost by the change in activity. That amount is plugged into one of the activity levels to determine the total fixed cost.

Contribution margin ______.

becomes profit after fixed expenses are covered Sales - Variable Costs

When a company sells one unit above the number required to break-even, the company's net operating income will ______.

change from zero to a net operating profit

Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs total $30,000. A move to a larger facility would increase rent expense by $8,000, and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will ______.

decrease by $2,000 $6,000 (1,000 × ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n) ______.

decrease in the unit variable cost

Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. The company expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n) _____ of $_____.

decrease; 3000

When constructing a CVP graph, the vertical axis represents ______.

dollars

Estimating the fixed and variable components of a mixed cost using the _____ approach involves a detailed analysis of what cost behavior should be.

engineering

Once the break-even point is reached, the sale of an additional unit increases contribution margin by an amount that is ______ the increase in net operating income.

equal to

Total contribution margin equals ______.

fixed expenses plus net operating income

A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating _____.

leverage

It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals _____ _____ behavior.

linear cost

The amount by which sales can drop before losses are incurred is the _____ of _____.

margin of safety

Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.

net operating income

The contribution margin equals sales minus all ______ expenses.

variable

When using the high-low method, the slope of the line equals the _____ cost per unit of activity.

variable

When using the high low method, the change in cost divided by the change in units equals ______.

variable cost per unit

The contribution margin is equal to sales minus ______.

variable expenses

Profit = (selling price per unit × quantity sold) - (_____expense per unit × quantity sold) - _____ expenses.

variable; fixed

A non-profit organization is trying to determine the fixed and variable costs of providing meals. During the first six months of the year, the following meals were served and the following costs were incurred. Month --- Meals --- Costs January --- 1,500 --- $5,200 February --- 1,700 --- $5,700 March --- 1,200 --- $4,100 April --- 1,100 --- $4,200 May --- 1,150 --- $4,250 June --- 1,650 --- $5,550 The cost equation using the high-low method is ______.

y = $1,450 + $2.50x. The high-low method uses the highest and lowest level of activity, not costs. February (1,700 meals and $5,700) and April (1,100 meals and $4,200) are the high and low activity months.